While the Boston-based industrial conglomerate has suffered through a rough few years, rendering its share price insignificant in the blue-chip index, one team of analysts are bullish on the ability for GE stock to overcome a short-term beating and outperform over the next 12 months. (See also: GE Sheds Transportation Business in $11.1B Deal.)
Investing Based on Dow Changes
On Tuesday, the S&P Dow Jones Indices managing director and chair David Blitzer said in a statement that Walgreens will offer more representation of the consumer and health care sectors of the U.S. economy than GE, making the Dow a "better measure of the economy and the stock market."
Many are looking at the decision as marking a shift in the larger economy from manufacturing to more of a service orientation, as reported by CNBC. While it's true that the replacement of old Dow players by new ones—such as Cisco Systems Inc. (CSCO) replacing General Motors Inc. (GM) in 2009—reflects new trends, analysts at Goldman Sachs suggest that investing based on the changes will serve as a good bet in the short term.
In a note to clients Tuesday, Goldman analyst Joe Ritchie wrote that, "while a negative in the near-term [for GE], we note that recent removals from the index have gone on to outperform the DJIA in the 12-months following the announcement." By the time the index committee acts on dumping an underperforming player, it's probable that most of the bad news and weaker financials are well-priced into shares.
Brighter Post-Dow Prospects
In the 12-month-period after telecommunications giant AT&T Inc. (T) was replaced by smartphone maker Apple Inc. (AAPL) in the Dow, the former rose 15% compared to the broader S&P 500's 2% decline over the same period. When sportswear leader Nike Inc. (NKE) took the spot of aluminum production company Alcoa Corp. (AA) in 2013, the latter skyrocketed 96% in the following 12 months. Bank of American Corp. (BAC) and HP Inc. (HPQ) returned 17% and 73% respectively in the one year following their removal from the Dow in 2013.
Trading down about 0.5% on Friday, GE reflects a 26.2% decline year-to-date (YTD) and a 54.1% loss over 12 months, compared to the S&P 500's 3.4% return and 13.5% gain over the same respective periods. (See also: Dow Stocks That Outperform When Rates Rise.)